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Small business wins big

Six years after the Guardian filed a lawsuit accusing SF Weekly and its chain owner of illegal predatory pricing, the California Court of Appeals has issued a precedent-setting ruling that not only affirms the Guardian's claims but strikes a dramatic blow for small independent businesses in California.

A three-judge panel concluded Aug. 11 that the state's Unfair Practices Act protects businesses from cutthroat predators that sell a product below cost with the intent of injuring competition. The judges, Robert L. Dondero, who wrote the decision, and James J. Marchiano and Sandra L. Margulies, who concurred, directly rejected an argument that would have undermined the historic law and concluded that the state of California has every right to provide small merchants with greater antitrust protections than the federal government.

It marked the first time that a state appeals court had weighed in on whether California's UPA should be enforced under the weaker federal standard. The ruling offers broad protections to small companies trying to survive against the market power of giant chains.

The Guardian sued SF Weekly and the New Times chain, now owned by Village Voice Media, in 2004, claiming that the Weekly was systematically selling ads below cost in an effort to put the local competitor out of business.

Evidence presented in a six-week trial in 2008 showed that the Weekly had lost money every single year since New Times bought the paper in 1995. The Phoenix-based chain poured tens of millions of dollars into propping up the Weekly, while the Weekly's sales staff sold ads at a fraction of the cost needed to support the operation — all with the goal of taking business away from the Guardian.

"We have before us the case of an ongoing, comprehensive, below-cost pricing scheme instigated and executed conjointly by two parties," the court concluded.

It was a classic case study in what the UPA, which dates back to 1913, was designed to prevent: a big, wealthy corporation using its deep pockets to cripple a local competitor. The court decision notes that shortly after New Times bought SF Weekly in 1995, New Times Executive Editor Mike Lacey announced that he would use the chain's deep pockets to assault the Guardian. "The essence of Lacey's message was that he wanted to 'put the Guardian out of business,'<0x2009>" the ruling states. "The sales representatives were made aware that advertising could be 'sold below cost' if needed 'in order to make a sale' and the resources of New Times would cover the loses, even over a term of many years."

The end result, trial records showed: SF Weekly and the East Bay Express, which New Times bought in 2001, lost a total of $24 million between 1996 and 2007. (The Express was sold in 2007 to local owners.)

A San Francisco jury ruled March 5, 2008 that the Weekly and New Times had violated the law and awarded the Guardian more than $6 million. The statute allows for treble damages, and Judge Marla Miller increased the award to $15.6 million. With interest and attorney's fees, the verdict now exceeds $22 million.

New Times appealed, raising two central issues. The verdict, the chain argued, was invalid because the Guardian never demonstrated which individual accounts it lost because of which specific below-cost sales. And the law itself was dubious because it doesn't require a plaintiff to prove that a predatory competitor had the ability to recoup its losses after driving the smaller outfit out of business.